July 4 2012: What is your take on the overall direction of the economy and the stock market?

Congress Is Out To Kill The American Middle Class

STUDENT QUESTION

Scott,
Thank you for taking the time to answer questions. I hope you will allow me to ask a few more questions. Although I am a physician now I was trained a scientist and I love to ask questions. I am encountering a growing sentiment that the stock market will be flat for the rest of the year. But it may tank and tank quickly because of national and private debt, inability of national leadership to deal with the financial issue and crises in Europe and Iran. What is your take on the overall direction of the economy and the stock market? Are you familiar with Martin Weiss? I am reading his book “The Ultimate Money Guide for Bubles Busts Recessions and Depression.” I must agree with Mr. Weiss that the financial problems that almost caused a meltdown of the financial system have not yet been addressed. The longer we wait the bigger they become. I don’t think anyone knows when that might occur or whether it might manifest itself as hyperinflation or deflation. It might be both and we may be headed for a period of economic contraction (overall deflation) accompanied by high inflation, Nasty!! On the other hand, I suspect you are an optimist. What does an exponentially increasing debt a rapid expansion of the money supply a housing market in depression and trillions of dollars in toxic assets still burried in the financial system imply to you???
Thank you for your opinions. I would very much value your professional opinion.
Best wishes,
Dan

ANSWER

Hi Dan,
I was trained in my undergraduate as a molecular biologist at Indiana University. I was planning on taking over my dad’s optometry practice but he died of throat cancer. We lost the practices.
I went on to a Ph.D. in pharmacology and toxicology at the U of Arizona but hated it and left.
I found my calling on finance and finished my Ph.D. in finance at the U of South Carolina. Hence I too have a firm grounding as a scientist.
The biggest danger I perceive to our investing profitability is the ability of marketers to wrap half truths or non-truths into emotionally charged stories designed to guide our actions in a direction desired by the marketer. One of the most annoying assertions of marketers is that finance and economics professors in the ivory tower don’t know what is going on.
That is simply not true.
For instance my dissertation that was sponsored by the Chicago Board of Trade clarified the unfounded myth that slippage on market orders is harmful to futures traders. It took me 3 years and around 40 hours per week to answer that question that slippage is as often good for the trader as bad.
Another question that we clarified recently is whether contrarian trading strategies beat the market. Evidence clearly indicates that momentum is the better bet to trade.
Also annoying is that people forget that every single expert in every form of trading was first educated by a finance professor. We know what they are doing as stock, futures, forex, and options traders BECAUSE WE TAUGHT THEM!
I am a very active academic researcher and this gives me an enormous. Many questions do have answers but are buried in the financial economic academic literature.
As a scientist you should be very wary of macro-economic assertions and especially those from a non financial or economic academic. It looks like Weiss, who appears to have Ph.D. in management is singing the same song; America is printing too much money, the goons in Congress spend it all, and toxic debt is going to take us all all down.
The macro-economics literature does not support this nonsensical rant.
Well, let’s take each argument. First of all the US is printing more money because it can. This should weaken the USD but it is actually strengthening (and I have been profiting from that strengthening) against other areas that are not printing more money (Norway and Sweden for example).
Let’s look at the federal budget deficit. A Nobel Laureate and a true giant of a macro-economic researcher is Joseph Stiglitz. He explains that the federal government should SPEND MORE in areas with an instant 40%+ return. Two such areas are our aging infrastructure and education. So crying about the federal deficit is a republican tactic with no merit.
Germany’s hard line of austerity is going to bite them in the butt. Germany and the republican refusal to raise taxes to fund increased government spending in desperately needed areas will lengthen our economic stagnation. There are ways to raise taxes that are relatively painless. And some taxes are outright onerous that should be eliminated… payroll taxes being the big one. But the republicans under the bizarre spell of Grover Norquist are simply prolonging the hell of the middle class.
They don’t care. They fly around the country in corporate jets and don’t need the roads. They send their kids to private schools and have no need for public education.
Let’s talk about toxic debt. The market most affected is real estate. But what exactly is the problem? Real estate has never appreciated more than the rate of inflation. The recent bubble was caused by Clinton’s intent to garner votes by making housing accessible to anybody that can fog a mirror. The whole problem started when GSE oversight was shifted from FHA to HUD. HUD is very pliable to the wishes of Congress whereas FHA was not. This misguided policy was carried into the Bush administration. So both Democrats and Republicans have mud on their face.
But as you read all of this stupidity and inappropriate actions in Congress you have to remember a couple of things. Empirical research shows no statistically significant granger causality of economic collapse converting to an equity, commodity, or currency market collapse. The stock market rose at the beginning of the Great Depression and refused to remain depressed. Our global system is very flexible connected.
Where I ask is there a safer haven for money around the world that the United States?
The U.S. is the safest. The major stock market indices are all on the rise; the market is bullish. A three year old with a ruler and pencil can see this. Again this is not optimism and I am not an optimist. I am an academically qualified (I publish) finance professor.
I would be happy to send you research articles now and then that would be useful for you to read. Do not trust anything written in economics of finance in the popular literature unless it is written by the likes of Joseph Stiglitz, Robert Shiller, etc.
Shake off all of the emotion. These different people that you are reading have you all hyped up. Calm down and read material from a higher level with caution and dispassion and your view will change.
Let me know if this helps,
-Scott